How economists use the neoclassical benchmark:
- At Chicago: Assume that the economy is at the neoclassical benchmark, and demonstrate that whatever exists is, in some subtle sense, constrained Pareto-optimal efficient–except where ham-handed government intervention has caused messes.
- At Berkeley: Investigate the deviation from the neoclassical benchmark that can be caused by one single but significant market failure, demonstrate that this deviation matches up to some important feature of the real world, and demonstrate that a clever, subtle, and strategic government intervention can move us to a situation that is constrained Pareto-optimal.
If we were to be unkind, we would call these the market fundamentalist and the statist approaches (in Brad DeLong’s case, a social democratic statism). We can add a third approach, community governance.
- Investigate the deviation from the neoclassical benchmark, demonstrate that this deviation is causes by badly designed government and market institutions that have crowded out community governance. To address this failure, develop institutions and property rights that support community governance as a complement to markets and governments. Note, however, that effective community governance is usually based on insider-outsider distinctions, between Us and Them.
For an introduction to community governance, see
Ostrom, Elinor. Governing the Commons : The Evolution of Institutions for Collective Action. Cambridge: Cambridge University Press, 1990.
Ellickson, Robert C. Order Without Law : How Neighbors Settle Disputes. Cambridge: Harvard University Press, 1994.
You may also want to take a look at
Boehm, Christopher. Hierarchy in the Forest: The Evolution of Egalitarian Behavior. Cambridge: Harvard University Press, 2001.
For researchers doing interesting related work, see the list of network members from the Norms and Preferences Network.